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What you need to know before buying an advice firm

During my tenure as managing director of The Fry Group, we made four acquisitions over 10 years.

Sadly, no one thought to give me the ‘How to acquire a business’ handbook in advance. Perhaps I can save you a little of the inevitable pain with some of the lessons I learned along the way.

Make no mistake: buying an advice business is a serious matter. At the very least you will be risking your investment capital and potentially your firm’s reputation. You will also be committing yourself to a lot of hard work.

Before you start the process, it’s worth asking yourself why you’re looking to acquire another firm in the first place. It may be that you already have a strategic plan in place, and see acquisition as a way of hitting your specific business goals.

If you don’t have a plan, then stop right there. You need to write up a plan to figure out what you want, by when and for what purpose, and then build out the strategy from there.

Once you’ve done that, it’s worth challenging yourself to revisit that first question - why are you doing this?

It’s probably not for the reasons that first come to mind, for example, creating a bigger brand, employing more staff, gaining a wider geographic footprint, and generally taking over the world.

It’s also probably not about growing client numbers and assets under advice. In my view these factors are merely the means to an end.

When it comes down to it, acquisitions are about driving more profit, full stop. So if the main driver is more profit, we should be honest enough to admit that. We should also not lose sight of the profit objective as we go through the process.

Rules of thumb

Before you go looking for a business (or it comes looking for you), figure out how you are going to extract profit from the deal. What attributes would a business have to have to give you the greatest prospect of generating a profit? List them and place them in order of priority.

On finding a firm you want to acquire, test it rigorously against your wish list. Consider that once the deal is done, this business is going to be a foreign body living within your firm. No matter how painful or costly the process, if there are elements that do not fit either your processes or your culture these will have to change or be eradicated as swiftly as possible.

My first golden rule is therefore never to buy a business that is greater than 25 per cent of your own. You can measure that how you will, be it turnover, assets, staff numbers or advisers.

My second rule (which may not work for everyone) is to never retain the principals. They will have been used to running the show and making decisions. As the acquiring firm, you need to be in control and have the power to make change happen. I believe that ultimately the previous principals are unlikely to be your champions in the new enlarged firm.

While we’re on this point, don't forget that 99 per cent of your business culture is down to the staff. These are people that have been hand-picked by you over the years, they have been trained by your firm and have become individuals you trust.

They may have stayed with you through thick and thin, and largely this will have been because they like the company culture. An acquisition means introducing these trusted souls to what is effectively a random bunch of strangers.

A few of the acquired team will probably settle in to the new way of working, while others may wait then find their right moment to move on.

But there may also be a disaffected few who will linger and become toxic to your business. You will spot them very quickly and when you do, it’s time for them to go. This rule should be applied regardless of who the culprit is. Keeping a high business producer on despite their attitude will in the long run add up to more trouble than it’s worth.

So, back to extracting profit. For acquisitions to work, the acquiring firm needs most of the clients to come across.

Client ownership is a contested issue, and clients are within their rights to leave if their adviser moves on.

There are two simple remedies to this. The first is, don't buy a business if you think this will happen en masse.

Think about interviewing the advisers that are set to join - would you give them a job if you were recruiting? If not, the cultural fit might not be right and those new advisers may leave as soon as it suits them.

The second remedy is to embed the clients into your processes, using a proprietary investment solution which is suitable for the clients’ needs. This builds firm loyalty with the client and reduces the pull a former adviser can exert.

The same might go for the choice of platform, the client’s preferred pricing structure, communication channel or any other specific hook that will retain the client irrespective of the adviser’s future with you.

After all that, if you still think it’s a good idea to buy a business then good luck to you - you may just need it.

My experience is that making the tough decisions before purchase and through the integration process will reduce the reliance on luck and help keep your original reasons for the acquisition front of mind.